Internet Sales Tax Loophole Cuts Both Ways On Main Street

BOSTON — Lawmakers on Beacon Hill are holding a hearing Thursday on a proposal to close the legal loophole that allows major Internet retailers like Amazon.com and Overstock.com to avoid charging sales tax.

For years, tax-free shopping has been as close as your computer keyboard. But now, the Retail Association of Massachusetts, which represents bricks-and-mortar retailers who are pushing the bill, says it’s time the major online retailers — and their customers — pay their fair share.

Belmont bicycle shop owner Clint Paige says these days he’s losing more and more business to the online competition — particularly on smaller, more expensive items,like high-end cycling shoes, that are easy to ship and allow customers substantial savings by not avoiding the state’s 6.25 percent sales tax.

“Those shoes might cost $250 to $350, and it’s not unusual for customers to come in here and try them on and we won’t always make the sale,” said Paige, the owner of the Wheelworks chain of bike stores. “And sometimes we’ll see that customer back here several weeks later with a pair of shoes they’ve purchased over the Internet. On an item like that it can be an extra $15 or $20 savings for the consumer. So it’s a rational decision from their point of view.”

Rational, but not fair, says state Sen. Steve Tolman (D-Watertown). Tolman, a sponsor of the bill, says the state is losing out on between $300 million and $500 million in annual revenue — a lot of money with the state facing deficits and spending cuts.

“When budgets are tight, we are going to be more focused,” Tolman said. “We have a fiduciary responsibility to the taxpayers to make sure businesses who play by the rules here in Massachusetts are not getting shortchanged by out-of-state pirates.”

In 1992, the U.S. Supreme Court ruled that Internet retailers only have to charge sales tax in states where they have a “physical presence.” Physical presence has generally been interpreted to mean either a headquarters or a warehouse staffed by employees of the company itself.

Tolman’s bill would expand the definition of physical presence to include local affiliates of the big online retailers — businesses, blogs, and non-profit organizations that help companies like Amazon advertise their products. In return, affiliates like UPromise, a Newton non-profit organization that helps families save for college, receive a commission of around 15 percent.

There are more than 5,000 such affiliates in Massachusetts, and they say the law will hurt the state revenues, not help.

In Lexington, Cartera Commerce founder and chairman Dave Andre employs 75 people and is planning to expand his company, which acts as a middleman between online retailers and consumer-reward and credit-card points programs. If the new law goes through, he says as many as 100 online retailers will likely sever their ties with Cartera in order to keep selling tax-free in Massachusetts.

Andre points to other states like Rhode Island and Colorado, where Amazon.com has simply killed its Amazon Affiliates program after legislatures there passed similar laws. If Tolman’s bill passes, Andre said his expansion plans could be in jeopardy.

“When states pass legislation like this, they will say hey, it’s just way too much hassle, way to much expense for us and they will instead just terminate their relationships,” he said. “The real question is will this work? It has not worked in any state. It has not collected any additional sales tax, and it has damaged jobs.”